It is hoped that this article will inspire you to think about leasing no matter what role you play in asset securitization. The story of one company's success with securitization wifl help you decide if the growth will be with lease securitization.
It is difficult to envision another short word like lease which describes so imprecisely and so broadly a class of assets. Or is it liabilities? Or is it not even on the balance sheet?
Leases ... does that have to do with apartments or office space? Maybe it has to do with those low monthly payments on that new Mercedes in your prage. Or maybe it is about widebody jets or railroad rolling stock.
If your mind began to look in on any of these areas, you can appreciate why we need a little focus now. That focus is equipment leasing.
Reliable Data Source
Data on the equipment leasing industry are difficult to find. But one excellent and ever-improving source is the Equipment Leasing Association of America. The name was adopted last October. This trade and lobbying organization used to be known as the American Association of Equipment Lessors. Annually, ELA surveys its members and compiles statistics about the industry.
From the survey, we can leam that transaction size (which is based on the original equipment cost and is one way to segment the industry) is widely varied. Generally, leasing companies consider themselves to be specialists in either large-, middle-, or small-ticket markets.
The large-ticket market, a segment of 11.8%, is made up of transactions over $2 million; middle market is from $50,000 to $2 million, 51.5% of the industry; small ticket is under $50,000 dollars, 36.7% of all leasing done.
In 1990 the small-ticket industry leased $120.3 billion of equipment based on its original cost. There has been a declining growth ratc and indeed, the industry contracted in 1990 from $122.5 billion in 1989. It is quite possible that the reduction had more to do with companies not making equipment decisions as opposed to small-ticket leasing losing favor as a financing tool.
The small-ticket industry can be looked at in other subsets such as provider types. There are:
* Large companies owned by strong parents.
* Independents that finance their own originations, often on their own balance sheets.
* Captives that support the sales of the equipment company that owns them.
In this highly fragmented segment there are many small leasing companies and leasing brokers that add to the overall volume originated.
When surveyed in 1990 the small-ticket players in the leasing industry said they specialized in financing equipment in the following categories: o 28.9%; computers, 17.8%; telecommunications, 6.7%; industrial/manufacturing, 5.6%; agricultural/construction, 4.4%; medical, 4.4%; transportation, 4.4%; other, 8.9%; and no specialty, 18.9%.
Here is the mark of diversity with the only equipment type over 25% being office equipment and the next highest category is the epitome of diversification: no specialty.
Advanta Leasing Corp., located in Voorhees, N.J., is a smallticket leasing company with 90% of its lease transactions based on equipment costs of less than $50,000. It is a wholly owned subsidiary of Advanta Corp. a multiproduct financial services company with over $3 billion in assets, headquartered in Horsham, Pa.
Keeping focused is important for this business to be successful, so Advanta has developed this mission statement which in a nutshell describes the company:
To originate and service small-ticket commercial leases provided to a diverse base of customers and through cost-efficient means of marketing offer a broad means of leasing programs and terms.
The supporting statements which follow emphasize areas of activity that are important to a company like Advanta.
* Business origination.
* Culture of growth.
Business is originated in four ways: The most significant effort is in national account programs to manufacturers who sell through distributors throughout the country supported by telemarketing sales executives.
Use as Sales Tool
Account executives also sell leasing as a sales tool by directly calling on vendors of small-ticket equipment in the metropolitan areas in and around New Jersey.
In addition to these two vendor programs, a broker funding unit supports brokers nationwide either on a deal-by-deal basis or by bulk purchases of groups of leases that the broker or small leasing company has originated recently.
Finally, lease origination by portfolio purchases. Advanta acquires portfolios based on analysis and due diligence of a large group of leases. These transactions generally exceed $2 million. The result of these efforts has produced a company with over $125 million of lease receivables with an emphasis on diversity.
The lessee customers are really mom-and-pop America. The categories have no greater concentration than 7% of one specific SIC code. There are lessees located in every state, but the highest concentration in any one state is 14%.
Types of equipment, geography, types of business, and limited lessee concentration all contribute to a portfolio of leases characterized by diversity.
In addition to the diversity of exposure, Advanta Leasing Corp. has a strong credit culture. In the small-ticket business, response time regarding credit decisions is what differentiates a company from a marketing point of view; but sound credit decisions are what make a company profitable in the long run.
Because of the diversity, Advanta is not an equipment specialist such as you might find in a large-ticket company, so the credit decisions are based more on the capacity, capability, and past reputation of the lessee and its principals to properly service credit that has been extended to them.
Each application is scored based on a number of factors and given an overall rating by credit analysts. The analysts have individual authority to approve lease applications based on their level of experience.
Larger transactions require lessee financial statements, and transactions over $50,000 require credit committee approval. An average for a month's origination has leases at $6,500 for a term of 44 months; consequently, $50,000 represents a large transaction. Additionally Advanta will not go over $150,000 to any one lessee.
Another aspect of Advanta's operation is its fully integrated servicing. From the time the application is received, usually by fax, it is entered into its computer system.
All credit information is accumulated in the computer. After a vendor or broker is paid, all transaction data are appended to that original automated record. That record provides the basis for billing and collecting, customer service, management reporting, and now investor reporting through our trustee.
If a payment is delinquent, a lease is assigned to a collector's automated work list. As calls are made, the collector is able to keep a written record of conversations and promises - all stored in that computer record.
The system automatically sends dunning letters and notices when needed. Should a customized letter be required, the system can dispatch one by mail or directly by fax.
Role for Retail Lockbox
For the vast majority of the lessees who pay promptly, or nearly so, a retail lockbox arrangement proves a useful adjunct to the automated operations.
As payments are received, they are transmitted daily via electronic means to the accounts-receivable module and least records are updated. This also allows for daily transmission of funds to the trustee for securitized leases.
The primary mission is accomplished by a strong credit culture and highly automated operations that support sales, credit, service, collection, and management reporting.
Financing of Advanta's operations has been done in a manner traditional to many leasing companies; that is, corporate capital and bank credit facilities for either recourse or nonrecourse financing.
Most often, the company has used full-recourse borrowing supported by its capital base and the pledge of leases to various lenders. This generally worked pretty well, but some serious changes in banks'ability and desire to extend credit caused Advanta to think about applying a broader sense of diversity to its financing arrangements other than just a lot of banks.
Advanta did its first securitization in October 1991. It now expects securitization to be a normal part of the financing arrangements and, indeed, plans to do its next deal this summer working with Prudential Securities Group.
In large part, Advanta Leasing Corp. was positively influenced by its parent company's experience in the securitization world. Advanta Mortgage has a well-known reputation for their curitization of second mortgages and home equity loans.
In addition, credit card securitizations have been an important part of Colonial National Bank's financing strategy. In 1989 when the leasing company balance sheet had about $50 million in receivables, Advanta began to study lease-backed securitizations.
This introduction to investment bankers brought now-obsolete information that the minimum economical deal was in excess of $100 million. There was also a wide variety of frontend fees and costs.
Needless to say, with a $50 million balance sheet and a costconscious culture that rivals the strong credit culture, Advanta did not sign up. The matter required more study.
It took almost 18 months to grow the balance sheet and to understand how the economics of securitization would fit into Advanta's financing philosophy.
Financing Advanta Leasing was based on:
* A strong capital position.
* A diverse group of banks that knew leasing and knew Advanta well.
* The need to have confidence of funding continuity.
* The desire to accomplish all of that at the lowest possible cbst.
Beginning in 1990 and continuing into 1991, Advanta experienced changes in the banking industry.
Sometimes a merger or consolidation meant withdrawal of a line of credit that was relied upon. At other times, banks ran into difficulties and chose to cut back on their lending activities. In Regulators' Spotlight
Even though Advanta felt it had enough banks to provide consistent service, it began to hear them all talk with the same perspective: one given by very strong regulators and bank eximination policies. Advanta Leasing was becoming a stronger company every day, yet credit availability was apparently shrinking - even as mtes were starting to come down.
Advanta established three objectives that it wanted to accomplish with a securitization:
* Access to new funding sources.
* Reduction of financing costs.
* Off-balance-sheet financing.
With these objectives in mind, Advanta become an intense student of securitization and began to understand the issues present when a particular type of asset is expected to support itself in the structure of securitizations.
Beginning the journey
The company had always been interested in the various performance aspects of its portfolio and now reary could focus the knowledge it had developed to satisfy rating-agency, creditenhancer, and investor issues. One clear fact was not an issue: what was needed to do as a securitization servicer made little to no impact on the majority of operations of the company.
Advanta began the journey by choosing an investment banker who understood the company as well as the industry and was able to provide the attention required for a "fint time issuer."
With that arrangement in place Advanta chose attorneys, accountants, the trustee, and the credit enhancer; and set out to construct the ded. There is not much leasing experience in the securitization world, so the duediligence sessions not only included standard "tire kicking" but a regular tutorial on small-ticket equipment leasing.
The leasing company leamed what was behind the word securitization as investment bankers, attomeys, and credit enhancers blazed new trails in leasing.
It is really important for a team to work well together, to agree to put egos in a box until the transaction is finished, and to listen actively and provide information in a timely fashion. have this kind of a team.
Together, they crafted a set of privately placed equipmentlease-receivable-backed securities that were marketed to four investors at a rate of 140 basis points over the two-year Treasury. The security was credit enhanced by a 100% surety from Municipal Bond Investors Assurance Corp. and therefore rated triple-a by Standard and Poor,s and moody's.
On Oct. 23-24 the team met in New York to close the transaction. Although not originally planned, the investment banker, ContiFinancial, purchased the transaction for settlement expediency and closed with the investors in the subsequent week. Advanta paid off all bank debt and began the process of rebuilding its balance sheet for the next securitization.
From May 1991 until the close in October, the team covered a great deal of territory to accomplish this securitization.
But one important byproduct that Advanta got was an even clearer understanding of the qualities of the Portfolio. The business did not have to change to do a securitization, as the market relied on things that were already important to Advanta.
The business is predominantly credit-extending operation. The underwriting standards, delinquency trends, and loss experience proved not only critical in determining credit enhancement levels, but, because of how Advanta monitored them, also gave some credibility into its capacity as a servicer.
The diversity of leasing activities with regard to equipment, geography, lessee exposure, industry, source of business, and term produced an attractive asset to back a security.
The relatively high-yielding nature of small-ticket equipment finance makes for attractive cash flows which support the credit quality of the security for credit enhancer and investor alike. An equipment lease has three components of its basic yield:
* The effect of an advance security deposit.
* The stream of rental payments.
* The accrual of residual equipment value reahzed at the end of the lease.
All three of these sources of cash are available to the trust to ensure investor repayment. But only the stream of rental payments was financed. So, once spread account caps are reached, the excess servicing comes back to Advanta.
The last aspect of Advanta's operation which lent itself to securitization was the company's ability to be the primary servicer.
That ability is underlined by a state-of-the-art automated system used in the course of regular operations of the company to carry out effective billing and payment-processing procedures, intense delinquency-collection activities, and - in the few cases when.needed - relentless work-out, recovery, and equipment remarketing processes.
One other aspect of an ability to securitize that may be unique for Advanta is the fact that its sister companies have been regular and frequent participants in the asset-securitization market.
As the leasing and only commercial credit subsidiary of Advanta Corp., it was never directed to securitize. But when ready, the leasing company did not have to convince the parent of the benefits. Advanta is a company of business focus and securitization plays an important Part of that focus.
Securitization has been a value to Advanta in the following ways:
It obtained the diversified funding that was sought. Although, banks are beginning to show a bit more interest in lending the role they win play will Probably not be as permanent funders but rather as interim warehouse financiers. Here too, they may see some impressive competition from investment bankers who are able to provide low-cost bridge financing into a securitization.
Securitization has provided improved earnings through lower-cost, Perfectly matched, fixed-rate funding. But the earnings to the company from servicing charges, such as late fees and insurance fees, come from having lease accounts whether or not the lease is securitized.
Boost for ROA, ROE
The off-balance-sheet effect means that this income improves return-on-assets and return-on-equity measurements of Advanta's performance.
The off-balance-sheet nature of the transaction has allowed for business expansion as bank lines are freed up to finance new business. Since the securitization in October 1991, Advanta has acquired two portfolios.
Being able to finance operations in a variety of different ways and at the lowest possible costs is one indicator of a longterm player. Advanta intends to grow in a controlled way as it enjoys its longevity.
Although Advanta is not a spokesperson for the entire leasing industry, it is their hope that when one asks the question - Asset-backed securitization - where's the growth? - the re sponse will be Advanta Leasing Corp.
R. ALAN LINDSAY Treasurer Advanta Leasing
R. Alan Lindsay joined Advanta Leasing Corp. as treasurer in 1988, assuming responsibility financing He is also chief of credit policy and human resources.
Mr. Lindsay started his career in 1969 with Girard Bank in Philadelphia. He was president of Girard International Bank, New York, and served as senior vice president in the international and community banking departments of Mellon Bank (East).
He attended the United States Naval Academy and is a graduate of the University of Pennsylvania, with a bachelor's degree in business administration, and the Stonier Graduate School of Banking.